Leighton gets grand designs

New chief executive
Hamish Tyrwhitt
wants
Leighton Holdings
to expand away from its roots in building into specialised design and engineering services, as he tries to rebuild the construction contractor after the worst annual loss in its ­63-year history.

“Ten to 15 years ago, the words ‘design and construct’ weren’t common, the main roads departments would do all of their design," Tyrwhitt tells The Australian Financial Review.

“We would get the construction set of drawings and we would just build. Now someone comes and says, ‘We want to move cars from A to B’, and we have to do everything."

The 48-year-old Tyrwhitt, who has spent almost his entire working life at Leighton, has started buying businesses that specialise in analysis and design to strengthen the company’s in-house engineering expertise.

“We will always be a general contractor at our core," he says. “But for us to truly sit here in the future and look at Leighton and say, ‘What are we good at, what are we unique at’, . . . we do need to get smarter."

Last month, Tyrwhitt made what he describes as a small but “very significant" acquisition, spending $3 million on the Malaysian arm of oil and gas engineering consulting group DPS Bristol, whose 100 staff will establish a new business, Leighton Engineering.

“It shows our strategic desire to become smarter as a company," he says, explaining that Leighton needs “better certainty of the engineering deliverables" when tendering for projects.

Leighton desperately needs to improve its risk management following a dreadful year in 2011, when it not only wrote down the value of its Brisbane Airport Link project by more than $800 million, but also wrote off some $750 million on the desalination plant it is building in Victoria.

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Although both projects suffered from weather-related delays due to the east coast’s floods and heavy rain, analysts say Leighton under-estimated the complexity of designing and building the projects, particularly Airport Link.

Investors support Tyrwhitt’s changes, pointing out that Leighton’s operating companies have gradually become less specialised after bidding against one another to win contracts.

“Leighton needs to work out what they’re good at," says Jason Beddow, chief executive of Argo Investments.

Rather than cutting back Leighton’s operating companies, Tyrwhitt may instead create more of them to pursue “niche markets and sectors".

He is loath to give away too much of his strategy but suggests one avenue of expansion for Leighton could be providing mechanical and electrical services to the liquefied natural gas (LNG) industry.

“There’s enormous components of that market that our customers are desperately wanting us to get involved in. I don’t believe it’s appropriate that it sits within one of the existing operating companies, because it needs to be structured differently."

Tyrwhitt identifies the booming LNG sector as the group’s biggest opportunity. “At Gorgon [the Chevron project in north Western Australia] we’re winning a lot of work supporting the LNG expansion and that will continue for at least a decade."

He is also confident of a strong future in Asia. “One of the big things I am doing is changing Leighton from being Australian-centric," he says.

“To me, we’re a company that is Australasian predominantly, we’ve obviously got the Al Habtoor joint venture in the Middle East but that’s only 4.5 percent of our business, the bulk of our business is spread across Australia and Asia."

At Leighton’s annual general meeting in November, Tyrwhitt stressed the company was in “the right place at the right time" due to industrialisation and urbanisation in Asia and the transformation of the global economy.

Still, he has no plans to abandon Leighton’s troubled Middle Eastern venture, where the company is still trying to recover money owed by clients. Tyrwhitt argues that the Middle East values foreign contractors and that the “petrodollar" (money earned though the sale of oil) will become more significant over time, particularly as countries in the region rebuild following wars and revolutions.

Tyrwhitt ran the group’s Asian operations for almost four years before getting an unexpected call in late August from Leighton’s board asking him to come to Sydney.

The board, under pressure from Leighton’s new owner, Spain’s Grupo ACS, had decided to get rid of former chief executive David Stewart after less than eight months in the top job. Tyrwhitt was asked to take over shortly after he got off a plane from Malaysia.

The dramatic CEO shake-up followed a hostile takeover of Leighton’s largest shareholder, Hochtief, by ACS. Tyrwhitt says he is determined to end the Leighton “soap opera" of the past few years. “My obsession is to return Leighton to being a successful, respected company."

Leighton is keeping a closer eye on its nine operating companies following last year’s cost blowouts. Approval from head office is now needed to pursue high-risk projects and Tyrwhitt says he will curtail internal competition, encouraging the most appropriate company to tender for specific projects.

But he has no plans to get rid of any of them, stressing he is “very, very supportive" of the operating company model because it allows each of the groups to develop a “unique DNA".

Centralisation at Leighton, the world’s largest purchaser of machinery from manufacturer Caterpillar, will be limited to changes that allow the company to capitalise on its buying power.

“We’re the fifth-largest employer in Australia," Tyrwhitt points out. He adds that when Qantas grounded its planes in October, he received a phone call from chief executive
Alan Joyce
asking for his support.

“I was a bit shocked to get that phone call, and then half way through the call I realised we’re Qantas’s fourth-largest customer with all of our fly-ins, fly-outs."

Tyrwhitt is gradually strengthening Leighton’s senior management team. Dharma Chandran, a former Ernst & Young and Westpac executive, has been hired to run the group’s human resources team, while Gerard Hutchinson, a former executive director of finance for services group AECOM, has been brought in to improve Leighton’s financial reporting systems.
Matthew Irwin
, a former Transfield Services chief financial officer, has also joined Leighton to examine the financial performance of its projects.

“Investors appear to have more confidence in Hamish than what they had in David and appreciate his candour," says Ben Brownette, analyst at the CBA Equities.

The biggest concern investors and analysts have about Leighton’s future is to what extent it will be determined by ACS.

Some fund managers have speculated that ACS, which effectively controls Leighton through Hochtief’s 54 per cent stake, could eventually de-list Leighton from the Australian Securities Exchange and fold it into the Spanish group.

ACS replaced most of the Hochtief representatives on Leighton’s board after gaining control of Hochtief last year. Analysts have noted that ACS appears to be collaborating more closely with Hochtief and Leighton.

A joint venture was formed in October between Leighton’s Middle Eastern Advance Rail Group and ACS’s Dragados subsidiary to bid for rail projects in Qatar, and analysts speculate that John Holland may team up with Dragados to bid for NSW’s North West Rail Link project.

And although Tyrwhitt will not attend ACS’s executive meetings, he will sit on Hochtief’s group executive, which includes representatives from Hochtief subsidiaries. The executive will meet 12 times a year.

This month, Tyrwhitt is off to New York for a meeting hosted by Hochtief subsidiary Turner, which has been working on the redevelopment of the World Trade Centre.

He says he does not know ACS’s long-term intentions. “I can’t control what happens, it’s not something I lose any sleep over."

But he shrugs off suggestions that ACS will force closer collaboration between the two companies. “As far as general construction work goes, I wouldn’t see the need to joint venture unless there was something we specifically needed to access."